What does it mean when a company is ‘under administration’?

ARM Cement PLC was recently put under the administration of Muniu Thoiti and George Weru of PricewaterCoopers (PwC). The news came as a shock to many Kenyans including investors and analysts.

Many people did not expect the giant Rhino brand cement manufacturer to be placed under the administration, especially because of the company’s reputation and because of its existing strategic partnership with UK development finance institution CDC. CDC invested USD140million to purchase a 41.66% stake in the ARM in 2016.

In July 1997, ARM Cement became the first family business to list its shares on the Nairobi Securities Exchange and now in August 2018 became the first listed business to be put under administration; a move analysts say might spell doom for NSE’s future plans to list other family-owned businesses.

ARM was placed under administration in line with the Insolvency Act 2015 that gives companies going through financial turmoil an opportunity to put their house in order including paying off of debts.

But do people understand what it really means for a business to be under ‘administration’?

According to Begbies Traynor, a company ‘going into administration’ is a formal insolvency procedure that offers protection from creditors’ legal action and that the process can either be instigated by the company directors or creditors (like it was in the case of ARM) or via a court order. A licensed insolvency practitioner will then be appointed and will take up the task of analyzing the company’s affairs to identify the best course of action going forward with the first aim being to ‘rescue the company as a going concern.’

In the 2015 New Companies Act and the Insolvency Act of 2015, the ‘administration’ and the purposes of a company being placed under administration have been clearly explained. Part III of this Act under section 522, gives the objectives of placing a business under administration. It says, “The objectives of the administration of a company are the following: (a) to maintain the company as a going concern; (b) to achieve a better outcome for the company’s creditors as a whole than would likely to be the case if the company were to be liquidated (without first being under administration) and; (c) to realize the property of the company in order to make a distribution to one or more secured or preferential creditors.”

Subsection 2 of the Act goes ahead to state that the administrator of any company shall perform the administrator’s functions in the interests of the company’s creditors as a whole.

The fact that the company has ‘gone into administration’ does not mean that the company is dead. As already mentioned, the first and main objective of the administrator is to try and ‘rescue the business or company as a going concern.’

There are two ways through which a company or business under administration can be rescued as a going concern:

Pre-pack administration – under this strategy, the main goal is to rescue the company and this can involve selling off parts or all of the business to new owners prior to entering full administration. Sometimes, the directors might choose to purchase the assets with their own funds and start off as a new company.

Company Voluntary Arrangement – this is where the company, upon the assessment by the administrator finds out that the administration will provide better returns to creditors than liquidation. Through this method, a new payment plan is initiated with the creditors, and as long as the repayments are made, interests and charges on the debts are stopped and the company is protected.

Based on what has just been explained, all is not lost for ARM Cement. There is so much at stake that the company cannot be allowed to go down the drain. Given the numerous investments both within and outside of Kenya, the administrators should be able to make the business an ‘administration success story’.

As the debate rages on, all eyes are now on PwC to do the right thing as spelled out in the law and to the best interest of all parties involved.